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Nationalise the Banks  James Cumes
 Jul 01, 2011 02:35 PDT 

The piece on Private Equity below was posted nearly five years ago -
before Bear Stearns, before Lehmann Brothers. We've been through a lot
since then. We must have changed much relation to hedge fub´nds,
derivatives, even private equity.
In fact, we have done little to change the activities of any of the main
elements of the global financial system that brought that system to its
Private equity still booms or busts according to the prospects it sees
for making a load of money. It is waiting there, not to build rational
economic growth and create employment. It is there to make money; and
the "regulators" will help it all they can.
Debt is bigger now than it was even before the Lehman crash in 2008. It
is getting bigger all the time thanks to the bail-out of the banks and
other devices which seldom deal with funbdamental and try to put off the
evil day.
Another crisis is building. Another monumental crisis seems guaranteed
to envelop us in weeks of at most moths - the final months of 2011
We have done nothing to prevent it or deal with it when it comes. We
have only made the catastrophe it threatens much more terrible than
Will there then at last be a rationality forced upon us.
We will never reform the banks or the global financial system. It will
never reform itself. The people know that, even if their politicians do
When the crunch comes, what will they do?
There is only one thing they can do.
They must take the banks and the financial system into their own hands.
They must national the banks.
They must nationalise the lot for the civilisation as we have known it
to survive.

James Cumes

Thursday, November 30, 2006
Private Equity
Private Equity

"Private equity" is a term that is comforting and, in a sense,
politically correct. It conjures up pictures of private people with a
few dollars saved up putting it into equities. Perfectly normal and
harmless; in fact, it's just the way the economy should work, for the
benefit of the widows and orphans as well as most everyone else.
However, private equity is a good deal more than that and it has been
spreading, on a quite remarkable scale, all around the world. It has
become bigger and bigger in the United States and the scale and value of
the deals has been doubling and more in Europe. In "America's Suicidal
Statecraft", I recorded that -

"....the economic and financial environment in which the IMF is required
to operate has now changed, quite fundamentally, a second time. The
first such change was in 1971, with the closing of the 'Gold Window'.
Now, [Professor] Kolko writes, 'The whole nature of the global financial
system has changed radically in ways that have nothing whatsoever to do
with ‘virtuous’ national economic policies that follow IMF advice –
[changed in] ways the IMF cannot control. The investment managers of
private equity funds and major banks have displaced national banks and
international bodies such as the IMF, moving well beyond the existing
regulatory structures."

Further on, I said that former Chairman of the Fed Greenspan had shown -

"...a careless disregard for the dangers that a reckless quest for
fast-buck profits posed for the American economy – and the society. In
an article in Forbes, on 13 March 2006, entitled “Private Inequity”,
Neil Weinberg and Nathan Vardi warned investors that, “driven by greed
and fearlessness, private equity firms are the new power on Wall
Street.” “A reckoning,” they said, “is nigh.” Amid other bubbles, the
“buyout bubble” had gathered pace and scale in the course of 2005 and
into 2006 and had changed ownership of major corporations in some six of
the biggest buyouts ever recorded.
At $106 billion, investors more than doubled their stake in leveraged
buyout funds in 2005 compared with 2004. A major operator, the
Blackstone Group, after making gains said to be 70% on Blackstone Fund
IV, launched a $13 billion Blackstone V in 2005. “Just half a dozen
giant firms control half of all private-equity assets,” Weinberg and
Varda wrote. “Three titans--Blackstone, Carlyle Group and Texas Pacific
Group--lord over companies with 700,000 employees and $122 billion in
sales. Buyout shops own such iconic brands as Hertz, Burger King,
Metro-Goldwyn-Mayer, Entertainment, Linens ’N Things and more. Adept at
reaping riches whether their investors win or lose, ten buyout chiefs
grace the Forbes 400 list of wealthiest Americans. Among them is the
billionaire cofounder of Blackstone: Stephen Schwarzman.”
They went on to say that 'There would be no reason to begrudge the
financiers their take if they were building enterprises and creating
jobs. But they do not make their fortunes by discovering new drugs,
writing software or creating retail chains. They are making all this
money by trading existing assets. Some buyout firms dabble in deeds that
got Wall Street and Big Business in trouble in the post-Enron
era--conflicts of interest, inadequate disclosure, questionable
accounting, influence-peddling and more. Increasingly the big guys jump
into bed with each other. Last year buyout firms sold more than $100
billion in assets back and forth to one another, 28% of all buyout fund
deals are up fourfold in two years, says Dealogic. Moreover, some buyout
shops ply rape-and-pillage tactics at their new properties. They exact
multimillion-dollar fees advising businesses they just bought. They
burden a target company with years of new debt, raised solely to pay out
instant cash to the buyout partners. It is akin to letting the Sopranos
come in and gut your business to cover your gambling debts.'
Neither the Fed under Greenspan nor other regulators showed any concern
about these transactions and their possible effect on the American
economy – that is, the macro economy, reaching far and wide into the
health of enterprises and individuals. In any event, they took no steps
to control or even effectively monitor “private equity” – or “inequity”.
If the rewards of the operators were obscene compared with the rewards
of the armies of workers whose jobs were potentially put at risk, the
distortions and corruption of the American economy by financial
sleight-of-hand of this kind – however legal – were obscene for the
American economy as a whole and, ultimately, for America’s status as a
world power. But the Fed, the Administration and the Congress and the
regulators – whoever they might be - did nothing. They let the caravan –
a caravan of ultimate destruction – roll on.The buyout mania spread to
Europe and on to Australia. Some large Australian enterprises were
bought by private-equity firms, including parts of the Packer media
empire. Then, about a week ago, news emerged that a private-equity group
was trying to buy Qantas, the famous Australian airline. I wrote to some
friends and contacts in Australia along the following lines -

I have been disturbed by reports that Qantas is being targeted by a
private-equity group headed by Macquarie Bank and Texas Pacific.
Amid a cluster of financial developments in recent years, involving
credit and other derivatives, hedge funds and other, ever more
intricately "sophisticated" devices, private-equity funds have grown to
what we can now fairly call massive proportions. The risks they
constitute to even the most powerful economies have grown robustly and
continue to spread like a destructive wildfire, potentially consuming
productive paddocks extending to the horizon and beyond, on an
unprecedented scale and at unprecedented speed.
Private-equity funds are just one more feature - and an especially
disturbing feature - of the self-destruction of the American economy. As
with so many elements in the American model, the plague that these funds
represent has been spreading its infection further and further - and
with constantly greater risks and potential devastation - to other
economies, in Europe, for example, and now, like a terrifying pandemic,
to Australia....
I hope that you and others will do all that you can to bring the
government, its economic and financial advisers and others to reflect on
these issues and bring some sanity to Australian thinking and to the
evolution of our financial and economic destinies, before it is too

The private-equity buyout seems to have its origins in the junk-bond era
of the 1980s when the "adventurers, marauders and buccaneers", as I
called them then, managed to get hold of enough funds to make takover
offers for often very large companies. There were stories of unknowns
being able to bid for General Motors. In Australia, bidders emerged -
some of them not so unknown, such as Holmes a'Court - for Australia's
then largest corporation, BHP.
That phase passed but perhaps its essential nature can be seen
reproduced in the mobilisation of funds of wealthy individuals by
asset-management companies and the application of these funds to buy
out, sometimes small, sometimes medium and sometimes large and often
iconic corporations.
The dangers then arise from what happens to the companies that are
"bought out". They are not acquired to make traditional fixed-captital
investment in factories and machinery so as to improve productivity and
production over the years. Rather are they acquired to make a fast buck
through a transitory lift in the share price. Wages are cut, costs are
reduced through "outsourcing" and some parts are sold off to make a
quick cash "profit". The acquired company characteristically has a large
burden of debt directly related to the buyout - a debt which will place
severe limitations on its ability to maintain and enhance real
fixed-capital investment in the enterprise in the future.
Those who gain most are almost certainly those smart financial operators
who manage the private-equity funds and set up the buyout deals. Those
who suffer most are those who get hit hardest as a result of the general
deteriroation of the real economy. That means characteristically the
workers and the middle-class professionals.
In that regard, I might just offer one final extract from "America's
Suicidal Statecraft" -

What we have in the United States now is fragile and overstated economic
growth precariously dependent on housing and refinancing bubbles that
are already collapsing while shortfalls in consumer incomes persist.
Only massive credit can sustain the consumer spending on which growth
and some sort of febrile stability in the American economy are based. In
addition, though seriously understated, inflation is increasing and the
trade deficit – a product of disguised inflation - is reaching ever new
records. Instead of strong fixed-capital investment which could and
should, in a healthy economy, bolster sustainable consumption,
corporations are pouring funds into stock buybacks, mergers and
acquisitions. Supported by a moody, flighty and highly-leveraged carry
trade, the highly vulnerable bond market faces a nervous future.
Equities are overpriced – largely because of the merger/buyback fever
and the competitive quest of mutual and other funds for “shareholder
value” - and have been moving in a narrow range for long enough to
suggest that, with a little nudging, they could be ready to tumble over
a precipice. Despite it all, consensus economists remain steeped in
denial: “The entrepreneurial spirit in the United States is alive and
well,” is a common view. “We have a 4.2% unemployment rate. And it’s
going down. Join us. Be competitive.” 4
Although these problems are particularly characteristic of the United
States, the American model has crossed the Atlantic and been adopted to
some extent – though far from completely - in Europe. For example,
“merger mania” has taken hold in Europe to such an extent that the total
value of all announced bids in the first quarter of the past five years
has moved from $257.9 billion in 2002 and $229.8 billion in 2003, to
$514.8 billion in 2004, $567.5 billion in 2005 and $859 billion in 2006.
Cash takeovers especially put proceeds into the hands of individuals or
– mostly – a variety of mutual, pension and other funds which then seek
profitable reinvestment in markets in which private equity buyouts and
cross-border mergers and acquisitions have caused the amount of
available stock to shrink. Funds seeking to buy that stock continue to
increase, with more and more publicly-traded companies making bids for
rivals using borrowed cash. Prices rise, booms and bubbles appear and
inflate and, just as in the United States, capital spending is diverted
from much more highly desirable fixed-capital investment to risky and,
to the general economy, much less beneficial investment through transfer
of the ownership of assets.
When a moment of acute crisis does finally arrive – as it inevitably
will - and decisive action becomes imperative, there may be little room
left for any new monetary and fiscal stimulus, especially in the United
States. American tax rates, especially for the rich, have already been
cut in a way that has contributed substantially to the already massive
budget deficit. Interest rates and credit policies are already, as the
Fed sees it, “accommodative” even after the rate hikes in 2005 and 2006;
and the economy is in even deeper trouble with debts, deficits and
bubbles than it was around the time of the short recession in 2000 to
2001. So far as the instruments they commonly use are concerned, the
administration and the Fed may be able to do little, in the event of a
crisis, to haul the economy back from the brink of catastrophic
# posted by James Cumes : 5:53 PM
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